Gildan Got Fleeced in the First Quarter

Gildan Activewear’s first-quarter results show falling earnings and sales when compared to last year.

In a Nutshell: “The quarter unfolded largely as we anticipated, with sales in line with our expectations, and year-over-year demand trends showing meaningful improvements sequentially across all categories and channels,” Rhodri Harries, executive vice president, chief financial and administrative officer of Gildan, said during the company’s earnings call on Wednesday. “We did experience some margin pressure during the quarter which came in slightly higher than we had anticipated due to the timing of fleece shipments. But all in all, we were pleased with our quarterly performance. And even though the economic environment remains uncertain, we remain comfortable reconfirming our outlook today.”

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During the first quarter, year-over-year point of sale (POS) trends at North American distributors were in line with the American Apparel parent’s predictions, “showing sequential quarterly improvement,” but still down compared to last year. International sales during the quarter were down 17 percent versus the year prior. The activewear company said it’s continuing to maintain a positive outlook regarding the recovery of international markets for the full year, supported by positive POS in the quarter.

“While our retail customers remain cautious on replenishment across all product categories, we were encouraged by improving inventory levels in the first quarter, reflecting what we believe is an improving demand environment for our products,” Harries said.

Gildan’s operating margin came in at 18.2 percent, including a $25 million gain from the sale and leaseback of one of its U.S. distribution facilities. Excluding this gain, the company’s adjusted operating margin of 14.6 percent came in slightly below expectations due to the “unfavorable” mix impact of lower fleece shipments to distributors during the quarter. However, as fleece POS at distributors were reportedly strong during the quarter, Gildan anticipates this mix impact to continue this year.

“Today, we reconfirmed our full year outlook, which we provided on Feb. 23, as we continue to believe we have the ability to drive top line growth in 2023. Specifically, while the economic environment remains uncertain, and we are dealing with cautiousness on inventory levels with our customers, our POS trends were in line with our expectations for the first quarter,” Harries said. “So even though the first half of the year was challenging, due to difficult comparative periods related to post pandemic inventory replenishment in 2022 and the impact of peak raw materials and higher input costs in our inventories flowing through our cost of sales in the first half of 2023, we see growth and margin improvement once these headwinds abate.”

In line with Gildan’s capital allocation priorities and commitment to return capital to shareholders, the company continued to be active on its share buyback program during the quarter, repurchasing 1 million shares at $32 million.

Net Sales: During the first quarter, Gildan generated net sales of $703 million, down $72 million (9 percent year over year), citing “anticipated headwinds tied to the current demand environment and strong comparative periods” in the first half of 2022 for the decline, which was in line with expectations.

In activewear, Gildan generated $588 million, down $80 million (12 percent) during the same period last year, aided by “distributor inventory replenishment following the pandemic and a tight manufacturing environment in 2021,” the company said.

The hosiery and underwear category was up 7 percent ($8 million) to $115 million, primarily driven by sock volume growth.

Earnings: Net earnings for the quarter dropped 33 percent to $97.6 million, down from $146.4 million year over year.

Earnings per share (EPS) fell to 45 cents from 76 cents a year ago. Operating income was $128 million, or 18.2 percent of sales. This included the benefit of the $25 million gain from the sale and leaseback of one of Gildan’s U.S. distribution facilities and is compared to an operating income of $162 million (20.9 percent of sales) in the first quarter of last year. Excluding the gain, adjusted operating income was $103 million (14.6 percent of sales), compared to $158 million (20.4 percent of sales) in the first quarter of last year. The decline reflected the gross margin pressure in the quarter and the impact of selling, general and administrative expenses (SG&A) sales deleverage.

Gildan generated a gross profit of $188 million in the quarter and adjusted gross profit of $184 million, down $53 million and $55 million, respectively, over the prior year. The drop was attributed to a decline in sales and lower gross margins. A gross margin of 26.7 percent and an adjusted gross margin of 26.2 percent were down year-over-year by 430 and 470 basis points, respectively.

“This is mainly a result of the flow-through impact on our cost of sales and peak fiber costs and higher manufacturing input costs, both of which were anticipated, and due to unfavorable mix,” the company said. “These factors were partly offset by higher net selling prices.”

CEO’s Take: “We are pleased with our top line results having met our sales expectations for the quarter,” Glenn J. Chamandy, Gildan’s president and CEO, said. “Moreover, even though the economic environment remains uncertain, we remain comfortable with our full year outlook given our strong competitive position, which we are reinforcing with the Gildan Sustainable Growth (GSG) strategy, and POS trends across our business coming in line with our expectations during the first quarter.”

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